Series 65 Question

Let's kick off December with a practice question that could easily show up on your Series 65 or Series 66 exam:

A state-registered investment adviser must do all of the following except
A. file an audited balance sheet with the Administrator if the adviser uses a qualified custodian
B. file an audited balance sheet with the Administrator if the adviser maintains custody
C. file an unaudited balance sheet with the Administrator if the adviser has discretion but not custody
D. file an audited balance sheet with the Administrator if the adviser accepts prepayment in excess of $500 six or more months in advance

EXPLANATION: NASAA tends to pull some factoids from their own model rules and policy statements that no normal human could have expected. I could easily see them expecting you to have read their model rule called "Financial Reporting Requirements for Investment Advisers," and, even though they swear their exams don't reward memorization . . . well, whatever. Turns out, if the adviser has custody or accepts prepayment, they need to file an audited balance sheet, complete with an opinion by the CPA, with the Administrator. If the adviser has discretion but not custody, the balance sheet must be filed, but it does not have to be audited, saving the adviser the expense of paying a CPA firm to review the adviser's books. If the adviser does not have custody, we assume it does not have to file an audited balance sheet.


ANSWER: a

Income Statement and Balance Sheet

The Series 65 and 66 will likely ask several questions requiring you to know the difference between a company's income statement and balance sheet. A company's income statement shows the results of operations over a financial quarter or over the fiscal year. It starts with revenue then deducts every cost and expense including taxes until we get to the "bottom line," known as "profit" or "net income after taxes." If you want to see the company's sales (revenue) and profits, look on the income statement.
If you want to see the company's financial health, look at the balance sheet. The balance sheet is a snapshot of the company's financial condition. Assets such as cash and securities, inventory, and equipment are listed on the "plus side," with liabilities such as deferred wages and accounts payable listed on the "minus side." The difference between a company's assets and liabilities is the net worth of the company, called "stockholders' equity" or "shareholders' equity."
Who reads income statements and balance sheets? Fundamental analysts. A fundamental analyst looks at the fundamentals of the company, including: revenue, earnings-per-share, book value, dividend payout, and profit margins. A fundamental analyst studies financial statements. He or she could invest in growth stocks, value stocks, a blend of each, whatever. But if he arrives at his stock picks through this school of thought, he is a fundamental analyst, and he is an active investor. A passive investor would not try to pick one company over another--he or she would use indexes almost exclusively.
Many students struggle with the difference between fundamental and technical analysis. We've already sketched fundamental analysis. Notice how it involves looking at a company's fundamentals. Technical analysis, on the other hand, studies the market data connected to the stock itself. A technical analyst doesn't care what the company makes or does, he just tracks the movement of the company's stock in terms of price, volume, and other market data. If he's talking about support and resistance, the 200-day moving average, or a head-and-shoulders pattern, he's a technical analyst. He's just tracking the stock price or movement of a particular index. A fundamental analyst, on the other hand, studies a particular company or industry sector in terms of sales, profits, growth trends, etc.

Practice Questions step-by-step

As I mentioned in the previous post, your job is not to look for the right answer. Your job is to find and elminate as many WRONG answers as possible. Let's apply this strategy to the following question:

Which of the following can be determined by looking at a corporation's balance sheet?
I. EPS
II. net income
III. quick ratio
IV. shareholders equity
A. I, II
B. II, III
C. III, IV
D. I, II, III, IV

Step one, read the answer choices A, B, C, and D just to see how the little Roman Numerals have been distributed. Right away, you see that this question either has a "I" in it, or it doesn't. Once we make that decision, two answer choices will be eliminated.
Or, for the extreme strategists, notice that three answers have a "II" in it and three have a "III" in it. If you could eliminate either "II" or "III," then, you would be done.
I know, some of you are thinking--but that has nothing to do with learning the information!
So what? Neither does the friggin' Series 65 or Series 66. It's just a hazing ritual that the regulators use to keep a certain percentage of folks out of the business and, thereby, claim to be "providing necessary protection to investors."
It's a game, people. Play it with strategy, win it, and move on with your lives.
So, as an extreme strategist myself, I have to go for the knockout punch here. I'm looking at choice "II" and choice "III" first.
Choice "II" says "net income."
Hmmmmmmmmmmmmmmmmm.
Where would net INCOME be found? Perhaps on the other financial statement called the INCOME STATEMENT?
A-ha! This question is just a bully and is about to get its butt kicked. There is a balance sheet, and there is an income statement. Net income is on the INCOME STATEMENT, not on the balance sheet. So, let's eliminate any answer choice with a "II" in it.
Let's see, that eliminates Choice A, B, and D.
Leaving us with the right answer, C.

People who say they "hate the Roman Numeral questions" aren't using strategy. These so-called "multiple multiples" are, by far, the easiest type of question to answer. You just have to be patient and analytical.

Send in a hard Series 65/66 question, and I'll break it down for the community step-by-step.